Asia's Growth Threatened by Rising Inequalities

Developing Asia's stellar growth rates have masked rapidly rising income inequalities. This poses a threat to sustaining the region's dynamic growth and social cohesion. The creation of productive employment opportunities has to be the central pillar of policy response.

Take China. Relative inequality on the mainland, as commonly measured by the Gini coefficient, is estimated to have increased from 0.41 in 1993 to 0.465 in 2004, much closer to levels associated with Latin American economies than those experienced by Asia's original newly industrialising economies - such as South Korea and Taipei,China - during their phase of rapid growth.

Rises in inequality are even more dramatic in terms of absolute inequality. Increases in incomes have been much higher for the top 20 per cent than for the bottom 20 per cent, even in those countries where relative inequalities have declined, for example, Indonesia and Malaysia.

At the same time, countries that do not have high income inequalities can have high non-income inequalities. India and Pakistan, for example, have very unequal outcomes in health status among their populations. In India, while about five out of 100 children are severely underweight among the richest 20 per cent of households, this share is as high as 28 per 100 for the poorest 20 per cent of households.

Increasing income inequality in developing Asia is not a story of the rich getting richer and the poor getting poorer, however. Rather, it is the rich getting richer faster than the poor. In fact, growth in incomes of the poor has helped to lower poverty rates over the past decade.

How should policymakers tackle inequality? The answer lies in recognising the factors responsible for the increases in inequality.

While the specifics vary from country to country, unevenness in growth in incomes between urban and rural areas, coastal and inland regions, and highly educated households and the less-educated, especially, are the immediate factors responsible.

Some of this unevenness is a natural outcome of the development process and is to be expected. Thus, in the case of mainland China, for example, it is to be expected that its integration with the global economy has been felt first in its coastal regions, where transport costs to major markets are relatively low, as opposed to interior regions.

Reversing the course of reforms, or of international integration, cannot be the answer. The key challenge is putting in place policies that enable the poor to more meaningfully participate in, and benefit from, economic growth.

In a nutshell, the creation of productive and well-paying employment has to become a cornerstone of policy.

This requires improving productivity and incomes in rural areas where the bulk of the poor reside; developing new growth centres located between the major cities and rural areas; and creating an environment for private-sector investment and growth.